Europe, Japan Hold Offshore Sales Promise
March 1, 1999
Tampa, Fla. - Besides the Internet, globalization was the major topic of conversation at the National Investment Company Service Association operations conference last week.
While industry leaders do not think the U.S. fund market is saturated, many did say that the time is ripe for U.S. fund companies to start to accumulate assets overseas.
Lee Gremillion, a partner with PricewaterhouseCoopers, said Japan and Europe offer U.S. fund companies some of the best opportunities to grow - an essential component of creating economies of scale.
"The more assets there are under management, the lower you can drive your costs," Gremillion said in a presentation before NICSA members.
Gremillion predicted that the largest money managers will gain more market share through acquisitions and economies of scale.
"The bigger will get bigger, and those who don't will get acquired," Gremillion said. "Size and economies of scale have real value."
To acquire the necessary heft, companies will have to look abroad where there will be the fastest growth in savings- especially retirement saving, said Gremillion.
According to U.S. Census Bureau statistics, the largest group of savers in the U.S. will stop saving and start spending their savings by the year 2006, Gremillon said. And since those savers have been driving much of the growth in the U.S., fund companies need to begin looking for assets abroad, he said.
One example of the kind of steps that are necessary to grow internationally is that taken by Warburg Pincus Asset Management, said Robert Pozen, Fidelity's president, who also spoke at the conference. Warburg Pincus agreed last month to be acquired by Credit Suisse Asset Management for $650 million. Warburg sought the acquisition in order to gain access to Credit Suisse's international distribution capabilities, a vital component of growing in the global marketplace.
Both Europe and Japan offer great opportunities for a number of reasons. One of them is that people in both countries have great savings habits, Gremillon said. China and Africa are too poor, Gremillon said. Others said the South American market is too regulated.
Europe has 365 million people, more than 100 million more than the U.S., and they like to save. However, they are not used to investing in equities and instead invest mainly in bonds returning four to five percent annually.
But, eventually growth of defined contribution pension plans modeled after those in the U.S. will take off in Europe. Gremillion says the continent is like the U.S. 10 to 15 years ago when defined contribution plans were just beginning to gain popularity here. As it did in the U.S., the defined contribution business will spur interest in the retail market and cause the average citizen to become more educated about mutual funds, Gremillon said.
In Japan, the average family saves 13 percent of its income, compared with four percent in the U.S., and assets are all placed in very low-yielding accounts.
Deregulation will produce considerable opportunities in retirement savings. Defined contribution plans are expected to be introduced in Japan in the year 2000.
"That will add more fuel to the fire," Gremillion said. As in Europe, the growth of defined contribution plans is likely to result in Japanese investors learning about mutual funds.
U.S. fund companies have advantages over local money managers in Europe and Japan because money managers here have created every type of fund product imaginable, Gremillon said. U.S. fund companies also have an advantage because they have mastered service. However, adopting the same practices abroad that companies have developed domestically will be difficult because of language and cultural differences. U.S. fund companies may have to set up local service centers to adapt to different cultures.Distribution, meanwhile, will be more difficult for U.S. players abroad since independent distribution will be almost impossible. In Europe, banks tend to control distribution while in Japan, large domestic securities firms have been the major distributors of mutual funds.